Fitch Comments on Fort Worth, Texas Audit Delay and Pension Funding.

AUSTIN, Texas -- Fitch has not adjusted its ratings on the City of Fort Worth, Texas (the city), despite significant delay in the release of the city's comprehensive annual financial report (CAFR) for fiscal year (FY) 2005, and an expected delay in the FY 2006 CAFR. The city anticipates the release of the FY 2005 CAFR by January 31, 2007 and the 2006 CAFR by early summer 2007, around two months later than estimates discussed with Fitch in September. The city has represented to Fitch that the financial performance for FY 2005 and 2006 was favorable, and this expectation is reinforced by monthly financial reports provided by the city. Fitch notes that over the last few years the city's annual contribution (AC) to the city pension system (the employee retirement fund, or EFR) has been less than the actuarial required contribution (ARC), contributing to a rising unfunded actuarial accrued liability (UAAL). The city is evaluating proposals to address this difference and expects the council to adopt a means of increasing funding at the beginning of calendar 2007. Further delays in the completion of the FY 2005 and/or 2006 CAFRs, audited results that are materially different than expected, or concerns arising from the funding of the ERF could have an adverse effect on the various ratings detailed as follows:

City of Fort Worth, Texas

--$213.6 million outstanding general obligation bonds, 'AA+';

--$73.6 million outstanding certificates of obligation, 'AA+';

--$452.6 million outstanding water and sewer revenue bonds, 'AA+'.

Service Center Relocation, Inc.

--$22.3 million outstanding lease revenue bonds, series 2004 (service center project), 'AA'.

In September 2006, the city estimated release of the FY 2005 CAFR by November 30, 2006 with no delay expected for the FY 2006 CAFR, which was anticipated to be issued by March 30, 2007. The delay of both the FY 2005 and 2006 CAFRs is due to the extensive time required to complete the city's FY 2004 CAFR, which was released in August 2006. The current release estimates of the FY 2005 and 2006 CAFRs provide for completion of each CAFR within a roughly six-month period, as is customary, compared to the city's September estimates which anticipated an accelerated four-month audit cycle for each CAFR.

The city changed auditors prior to the FY 2004 CAFR and during the audit process the city experienced difficulty in reconciling its bank statement to its general ledger, requiring the city to examine thousands of transactions over the prior five FYs. The net result of the reconciliation had limited effect on the city's financial position, with the most significant change being a negative $5 million restatement to the city's general fund cash position; there was also a sizeable positive restatement in the city's general fixed asset account group, but this did not directly affect operating resources.

Financially, the city remains healthy. Audited FY 2004 results point to continued improvement in general fund and utility fund operations and FY 2005 and 2006 are likewise expected to be favorable. However, with the FY 2004 CAFR, the city's independent auditors noted material weaknesses in relation to the city's method of cash reconciliation, tracking of capital assets, and internal controls. As a result of the delay of the FY 2004 CAFR and the noted weaknesses, the city hired an outside consultant to conduct an operational review (completed August 2006) of the city's finance department's procedures, internal controls, and staffing in order to recommend potential actions for improvement. The city is currently implementing all of the consultant's recommendations and Fitch expects that this will ultimately address cited weaknesses.

With regards to the city's pension system, the funding ratio of the ERF for FY 2005 was an acceptable 78%. However, while the city has made, and continues to make, its ACs pursuant to the city's retirement ordinance (and in accordance with Governmental Accounting Standards Board rulings) which stipulates the city's contribution rate, the city's AC has been below the ARC necessary to amortize the UAAL within a 30-year period, as is typical; for FY 2005 the city's AC equaled 73% of the ARC, while the FY 2006 AC was down to 60% of the ARC. As a result, without adjustments to the city's and/or employees' contribution rate and/or changes to retiree benefits, the city's AC likely will continue to be less than the ARC, with the probability of further increases in the UAAL; the UAAL at the end of FY 2005 was over $411 million.

Currently, the city is evaluating various options to address the difference between the ongoing city AC and the ARC as well as plan benefits, with the city council expected to take action as early as January 2007. The proposed increase to the city's contribution rate will require an increase in city revenues (potentially including a hike in property taxes), a reduction in expenditures, or a combination thereof. Despite the amount of additional funding required to eliminate the difference between the AC and the ARC, operations are not expected to be materially affected.

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